The present invention relates to investment systems and methods, and more particularly, to an improved investment system and method that enable investors to buy, sell, and hold interests in securities (e.g., stocks, bonds, etc.) in a flexible, organized, and cost efficient manner.
Every investor has unique needs. Some investors may have short-term investment horizons, while others may have medium-term or long-term investment horizons. Some investors may seek liquidity, while others may seek appreciation. Some investors can tolerate high risk, while others cannot. In any event, the ultimate goal of any investor is to develop a portfolio of investments that provides the highest potential return in light of the investor's individual investment goals, time horizon, risk tolerance, and cash flow needs.
When planning an investment strategy, it is generally advised that one considers having a diversified portfolio. For instance, participation in a variety of equity investment styles, such as growth and income approaches, and investments in a combination of large, medium, and small capitalization stocks, can potentially provide more balanced results over time. In general, the more diversified a portfolio, the less likely it is that an investor will be harmed by poor performance by any single investment.
One investment tool used by many investors is systematic investing, or so-called dollar-cost averaging. Dollar-cost averaging is the practice of investing equal amounts of money at regular intervals regardless of whether the markets are moving up or down. This technique may reduce the average investment costs to the investor, who acquires more investments in the periods of lower prices and fewer investments in the periods of higher prices. Dollar-cost averaging works best if the investor invests on a regular schedule, regardless of price fluctuations. One advantage of dollar-cost averaging is that it increases the likelihood that an investor will follow an investment program.
There are currently several investment vehicles available to investors for buying, selling, and holding securities. The term “investment vehicle” is intended to mean any entity or any combination of coordinated entities that enable investors to buy, sell, and/or hold investments. As will be explained below, currently available investment vehicles have one or more disadvantages.
One way investors can buy, sell, and hold securities is through a traditional brokerage account offered by a brokerage firm. By opening up a brokerage account, an investor can buy, sell, and trade securities through one or more third parties, i.e., brokers, on one or more of the appropriate public financial markets. One drawback to buying and selling securities in this manner is that the investor cannot buy fractionalized market units of the securities. The term “market unit” is intended to mean the smallest unit of a security available for purchase or sale on a public financial market. For example, in the case of a stock, the market unit is one share. The term “fractionalized market unit” is intended to mean a fraction of a security's market unit or a positive whole number multiple (i.e., 1×, 2×, 3×, etc.) plus a fraction of the security's market unit. For example, again in the case of a stock, a fractionalized market unit is either a fraction of a share (e.g., 0.3 shares, 0.8 shares, etc.) or a positive whole number multiple plus a fraction of a share (e.g., 1.3 shares, 2.8 shares, etc.).
Not being able to buy fractionalized market units of a security can be particularly problematic for an investor when the market unit price of the security is high and the investor wishes to have a diversified portfolio and has little money to invest at any one time. For instance, assume an investor wants to create a diversified portfolio consisting of a large number of blue chip stocks, each having a high price per share. In order to have a sufficiently diversified portfolio, the investor would have to buy shares of several different stocks, which could prove to be prohibitively expensive because of commissions. Moreover, it could be difficult for the investor to manage the acquisition of these shares with small sums of money due to fluctuations in the stock prices. The alternative would be for the investor to save up large sums of cash until the appropriate investments could be made. Such an approach, however, would preclude the opportunity for the investor to take advantage of a systematic investment program (i.e., dollar-cost averaging) and thus limits the investor's ability to slowly build a position in high quality, highly priced securities over time. Also, by the time the investor does manage to save up a large enough sum of cash, it may not be financially beneficial to the investor to invest due to adverse market conditions or other circumstances. Although many companies will typically split their shares to effectively reduce the price per share in order to bring a stock price into the buying range of more investors, even then, many investors still do not have sufficient money on hand at any one time to build a properly diversified portfolio using a systematic investment approach.
The high costs associated with buying and selling small quantities of securities on one of the public financial markets through a brokerage account is another major factor inhibiting individual investors who do invest through brokerage accounts from adopting a systematic investment program. Again, in the case of stocks, investors with larger amounts of investment capital usually buy or sell stocks in multiples of 100 shares, called round lots. Although small investors can buy just a single share or a number less than 100 (called an odd lot), brokers often charge more to buy and sell odd lot orders. The transaction fees associated with buying and selling small quantities of securities become an unacceptable cost for most small, systematic investors.
Some companies, in order to enable their shareholders to buy stock directly from the company (usually through a transfer agent) in very small to moderate amounts, offer what's referred to as a dividend reinvestment plan (DRIP), or offer some other similar plan. These plans give shareholders the option of reinvesting dividends to buy more stock. They also enable shareholders to directly buy additional shares of the company's stock on regularly scheduled trade dates. Although most DRIPs require an investor to own at least one share of stock in the company before enrolling, some DRIPs, called direct stock purchase (DSP) plans, will sell stock directly to the public. One advantage of a DRIP is that transaction costs are low. Another advantage is that once an investor is enrolled in a DRIP, the investor can buy or sell shares in the company without paying a brokerage commission. Several downsides to DRIPs do, however, exist.
First of all, all companies do not offer DRIPs. Thus, the investment options available to DRIP investors are limited. Second, DRIPS have fixed dates on which shares are bought and sold, and these dates are typically far apart. Accordingly, there can be considerable delay between the time an investor desires to make a trade and the shares are actually bought or sold. Finally, in order to build a diversified portfolio using DRIPs, an investor will have to arrange a DRIP with each company in the portfolio. Currently, individual DRIP plans are not coordinated and the costs and complexities that can be associated with arranging and managing a plurality of different DRIP plans can be a time consuming, confusing, and unpleasant experience for many investors. Each DRIP plan will have, for example, it's own set of paperwork that must be completed to participate in the plan, it's own set of rules for investing, its own trading dates, and its own method of issuing account statements. As a result, it would be virtually impossible to develop a diversified DRIP portfolio where, from the point of view of the investor, there is no substantial distinction between the processes for buying and selling shares of any of the stocks in the portfolio, i.e., the process for buying/selling shares of one stock would be substantially the same as the process for buying/selling shares of any of the other stocks.
Another investment vehicle available to investors is the mutual fund. A mutual fund is an investment entity that makes investments on behalf of investors who share common financial goals. When an investor invests in a mutual fund, the investor's money is pooled with other investors' monies. This pool of money is managed by the fund's management that invests the money in one or more types of investments, such as common or preferred stocks, corporate, tax-free municipal, U.S. government or zero-coupon bonds, convertible securities, gold, silver, foreign securities, and real estate. The amount of money invested in a particular investment depends on the fund's objectives and restrictions and on the fund management's perception of the economy.
An investor invests in a mutual fund by buying shares of the fund. In an open-ended fund, the price of the fund's shares is directly related to the value of the investments held by the fund. Mutual funds are popular primarily because they conveniently give investors, even those with small amounts of money to invest, access to a wide variety of professionally manages investment opportunities. Furthermore, mutual funds are popular dollar-cost averaging investment vehicles because they take a large portfolio of securities and divide that portfolio into small enough pieces so that almost any investor can buy or sell an interest in the entire portfolio.
Despite the many benefits of mutual funds, there are some drawbacks. First of all, mutual fund investors have no control over which securities are owned by the fund. As discussed above, in a mutual fund, the fund's management decides where to invest the fund's assets and when to buy, sell, or hold investments for the fund's portfolio. The investor has no choice in the matter. And, with all the attention given to investing today and the general awareness the public has toward individual investment opportunities, individuals today have far more investment savvy than any previous generation. The lack of investment decision-making power associated with mutual funds can prove to be frustrating, especially to the more sophisticated investor. This is particularly true when one considers the capital gains taxes incurred by investors in mutual funds. At the end of each year, a mutual fund pays out its profits and the investors incur capital gains. By not having control of when or what the fund buys or sells, the investors have no control over the tax implications imposed by the fund.
Second, the performance of a mutual fund depends almost entirely on the capabilities of the fund management. Oftentimes, investors, who invest in a particular fund based on the track record of the fund's management, find that the fund's management changes. At this point, the investor is faced with two options. One is to keep invested in the fund with the hope that the new management will be as successful as the prior management. The other is to sell the shares of the fund for reinvestment elsewhere. Neither of these options is necessarily very appealing.
Third, mutual funds can be expensive. A fund's management is paid for its services in the form of a fee that is based on the total value of the fund's assets. Even no-load funds have an annual charge that can average 1.5 percent. Moreover, many mutual funds have other costs, including sales charges, marketing and distribution costs (i.e., 12b-1 costs), contingent deferred sales load (CDSL) and redemption fees, and distribution taxes, which can often be quite high.
Finally, mutual funds are difficult to select. There are currently thousands of mutual funds available to investors and there is no real good way to determine which is best.
While other investment vehicles do exist, they, too, have drawbacks and do not address the problems solved by the present invention.